eCommerce has radically changed the rules of transacting. In fact, in many ways it has stripped the transaction process bare.
If you have what people want they will buy it - immediately - without ever entering your store, often without seeing the product first hand; and almost always without meeting or in any way engaging with you, the vendor. Once vital touch points of transactions, these are now just redundant ‘niceties’, with customers even happy to part with their cash well before they have received the goods or service.
Of course, not every business or transaction for goods or service can be conducted online. Many industries and professions are typically bound to the ‘provide work first and the payment follows’ model – with money usually changing hands too late or never.
This is a major issue as delayed receipts from customers are one of the most common causes of business stress. In fact, according to figures from ASIC, last year around 1 in 5 insolvencies were attributed to poor management of accounts receivable, and the cash flow issues that come hand-in-hand. In today’s tight operating environment, businesses that do not learn to work the culture shift brought on by eCommerce to their advantage will not survive.
Businesses must embrace the fact consumers have been reconditioned to parting with their cash in-advance of receipt of goods and services. Even businesses that don’t conduct their operations online can use this shift in consumer mindset and apply it to their businesses.
By carefully reviewing their terms of trade, these businesses can accelerate receipts from sales and protecting amounts owed to them from default. Business should do this by checking:
- price lists;
- payment terms (upfront deposits) and methods (EFTPOS, credit card);
- discounts;
- warranties and late payment charges;
- customer credit checks;
- credit control and efficient follow-up practices; and where appropriate,
- utilise the Personal Properties Securities register and take a security over assets until debts are settled.
From there businesses are able to better understand and plan their monthly cash flows. Reviewing gross margins and fixed costs is fundamental to knowing your business and its future prospects - it’s also a relatively straight forward exercise.
Less straight forward but equally important is understanding the business cash flow cycle. Cash flow is subject to many variables and unless understood and carefully monitored can create significant business tension. Cash flow can vary because of the financial position of customers; the relative bargaining power of customers; terms of trade and credit policies; the quality of goods and services, as well as the quality of the service experience customers receive.
Businesses need to simultaneously forecast profit and cash flow to ensure they clearly understand the timing cycle of earning revenue and when that translates to cash on hand to pay for materials, employee costs, rent, interest, other overheads, income tax and GST. Preparing a rolling 12 month profit & loss and cash flow forecast should start at the beginning of every financial year. It will identify the cash peaks and periods during the year where bank or owners support for funds may be required.
Often small business does not have the internal resources or time to appropriately and confidently undertake this task - if so this is perhaps the time to engage with your accountant and plan together for the year ahead.
Written by Grant Thornton Partner and private business specialist, Robert Scheiber.
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Grant Thornton Australia provides audit, tax and advisory services to dynamic, growing organisations and is a single national firm, with over 150 Partners, more than 1,200 people across Australia and national turnover of AUD $232 million. Grant Thornton International is the fastest growing international accounting network in the world, with a global turnover of US$3.7billion and more than 30,000 people, and was recently named 2013 Network of the Year by the International Accounting Bulletin.
